The lack of an efficient and resilient financial system is still holding back inclusive and sustainable growth in emerging markets.

Policymakers, regulators and financial services organisations should more actively shape a financial system that is fit for purpose.

These are the main findings of a new PwC Project Blue report ‘Geared up for growth: Shaping a fit for purpose financial system.’

The report showed that emerging markets need a robust and broad-based financial infrastructure to channel funds efficiently, draw people into the market economy and enable them to share in the benefits

In the report, PwC sets out what an efficient, resilient and inclusive financial system looks like across eight key dimensions; and how leading emerging markets including Brazil, China, India, Indonesia, Mexico, Nigeria and South Africa – rate against its ‘fit for purpose’ targets.

The assessment highlights considerable room for further improvement in key areas, ranging from financial inclusion to pensions and protection.

While growth in emerging markets continues to outstrip developed counterparts and hundreds of millions of people have been lifted out of poverty, the report posited that developing a well-functioning financial system remains critical to tackling poverty and sustaining economic growth over the long term.

In the PwC research, all seven emerging markets perform well on private sector lending, which is known to drive growth.

With the exception of Brazil, the report observed that the banking spread (difference between bank lending and deposit rates) in the emerging markets is low, improving borrowers’ ability to service debt.

Another key area in which most of the seven emerging markets do reasonably well is controlling the size of their banking system.

PwC observed that only the size of China’s banking sector – compared to its economy – could raise systemic concerns.

The report claimed that this cannot be said of other African country. For instance, it said that not only has Nigeria by far the highest percentage of its population living in poverty, its financial system is also showing the least progress of all seven emerging markets.

In five of the eight key areas, the report noted that Nigeria’s financial system scores significantly below PwC’s fit-for-purpose targets, holding back inclusive and sustainable growth.

However, the report said the success of Nigeria’s auto-enrolment pension model is a bright spot.

Beaming its search light on South Africa, the PwC report, claimed that although poverty reduction has stalled in recent years and it has the worst income inequality of all seven emerging economies, the late Mandela’s country is showing the most progress towards a fit-for-purpose financial system.

According to the report, four of the eight key areas for a healthy financial system are already supporting inclusive and sustainable growth, and while more work is needed – for instance on the high levels of indebtedness – the country is moving in the right direction in the other four areas.

The PwC noted that China and Indonesia under performing in number of key areas.

According to it, compared to the other emerging economies, China has the biggest difficulties with its pension asset management and the size of its banking system.

It stressed that China’s banks are facing a troubling collision of swelling balance sheets, high corporate debt levels and a rise in insolvency and default. The report said Indonesia seemed particularly off track when it comes to financial inclusion and a well-functioning housing sector.

In India, PwC claimed that the financial system is showing mixed signs of progress

Accordingly, it said strong innovation coupled with regulatory support is proving to be a boom for financial inclusion in India, with the country’s payments industry standing out from its emerging market counterparts by driving above-average growth in non-cash payments.

Painfully, it said that the country’s pension asset management and life insurance penetration are both significantly below healthy targets.

The report said Brazil’s household debt and comparatively high banking spread make its financial system vulnerable.

“But policymakers are actively working to reduce its banking spread. Another positive sign is the country’s use of electronic payments, opening up access to financial services for under-served communities. Mexico’s banking spread is already low, while it’s also actively promoting e-payments to accelerate economic development. However, it has more work to do on financial inclusion and life insurance penetration,” it stated.

“A fit for purpose financial system fosters inclusion, investment, access to credit and support for people when they retire, while promoting efficiency and protecting against systemic risks. The development of this financial system isn’t organic or passive. You shape it. Strong regulation and enforcement are essential for financial systems to develop, so regulators across different market sectors should get on the front foot and work together.”

“Our analysis clearly shows that some markets are ahead of others in different dimensions. Ask yourself the question: what can we learn from each other’s experience? Specifically financial services organisations should realise that many of the ground-breaking innovations in FS are being spearheaded in Asia and other emerging markets. Without ageing legacy systems to hold them back, they have clean sheets upon which to harness the latest developments in technology and develop their own distinctive business models,” he stated.